The potential of stocks & shares to outstrip the returns delivered by cash savings has been revealed as the prospect of at least another year of low interest rates looms large.
With Britain slipping into deflation for the first time in 55 years, it is feared that any rise in interest rates could now be delayed until as late as next summer. And even once rates begin to climb, any increases are likely to be gradual, leaving savers to continue to search for alternative sources of income for the foreseeable future.
Of course, investing in the stock market is one option for frustrated savers, and recent analysis has revealed the significant financial rewards that could be on offer by adopting such an approach.
Indeed, according to Fidelity Personal Investing, a saver who invested £15,000 into the FTSE All Share index over the 10-year period from 29 April 2005 to 30 April 2015 would have seen their money grow to £33,344.26. If, however, they had invested £15,000 into the average UK savings account over the same period, they would currently have just £16,271.25 – some £17,073.01 less.
At the same time, separate research suggests that the longer people are prepared to squirrel their money away for, the greater the chance investing in the stock market will deliver a higher reward than cash. Analysing returns going back to 1899, the Barclays Equity Gilt Study reveals that over any rolling five-year period, the UK stock market has beaten cash 75% of the time; over 10 years, it has beaten cash 91% of the time, and over 18 years it has beaten cash 99% of the time. Over any rolling 23-year period, shares have never lost money.
Of course, investing in the stock market is riskier than cash; investments can, and invariably will, fall in value at some point. However, it can also be argued that cash is not entirely risk-free either, as the value of money can fall behind inflation and gradually erode spending power.
"Savers should use cash to meet any short-term spending needs, and should keep an emergency fund of around six months' salary in cash," said Laith Khalaf, senior analyst at Hargreaves Lansdown. "Beyond that, savers should consider taking a bit more risk and investing, to try to beat inflation and deliver better returns over the long term, though if you take this route you have to accept there will be falls in the value of your investment along the way."
According to Fidelity, it is a message that ISA savers already seem to be heeding; in the 2014/15 tax year, investors put an average of £5,609 into their stocks & shares ISAs, some £1,985 more than the average of £3,624 entrusted to this option in the 2013/14 tax year.
"With inflation rates remaining at record lows, investing in a stocks & shares ISA over the long term is worth considering," said Tom Stevenson, investment director at Fidelity Personal Investing. "Although this is a more risky option than cash, as your money will be exposed to the vagaries of the stock market, the true value of a stocks & shares ISA will manifest itself over the long term."
Stocks & shares ISAs
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